How Centralized Crypto Exchanges Work?

February 8, 2022
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When Bitcoin (BTC) was launched back in 2009 as the first cryptocurrency on the market, it was quite hard to engage in crypto trading. There weren’t any exchange platforms like nowadays. Instead, you had to conduct a peer to peer trading deal with a Bitcoin trader who you first had to find either on a crypto forum or on social media platforms. This was very risky, because you never knew whether the person you’re negotiating a deal with is really going to stick to the agreement or pull a scam on you and just steal your cash or BTC.

That’s why crypto enthusiasts and financial experts launched the first crypto exchanges in 2010. These exchange platforms were called Bitcoin exchanges, because BTC was the only crypto on the market at the time. Soon enough, as developers started launching altcoins, crypto exchanges started expanding their portfolio of supported cryptocurrencies.

Let’s take a look at how centralized crypto exchange platforms work and why they are one of the most popular means of exchange and trading on the crypto market.

Centralized Cryptocurrency Exchange Platforms

A centralized crypto exchange platform is operated by a single company that owns the platform and acts as a central authority that regulates all of the platform’s daily operations. The platform’s security, supported cryptocurrencies, account registration protocols and offered services are all defined by the company that owns the exchange and the data flow is usually facilitated by central servers protected by robust cyber security measures in the case of top quality exchanges.

There are more than 400 crypto exchanges on the market and a large portion of that number is made of centralized platforms. Unfortunately, a lot of those platforms have low market liquidity and poor platform safety. Also, a lot of crypto exchanges are operated by shady individuals without proper regulatory licenses for operating in the regions where they are providing their services.

That’s why it’s best to stick to the most popular platforms with high liquidity, huge trading volumes and a lot of positive user reviews. Some of the most popular exchanges on the market include Coinbase, Kraken, Gemini, and Binance, but there’s a lot of additional platforms that also provide top quality services. A great way to find out which exchanges are worth using is by browsing the Exchanges tab on Coinmarketcap and monitoring the platform scores.

Trading Features

Centralized crypto exchange platforms offer a huge variety of trading features for both crypto beginners and experienced traders. You can place buy, sell, limit and stop loss orders as the most basic trading order types, but many exchanges also offer advanced tools such as margin trading and futures trading with crypto leverage options that can increase your potential gains manyfold.

The trading interfaces of centralized crypto exchanges always feature detailed market charts, where you can monitor the price fluctuation of a selected cryptocurrency or a specific trading pair. Charts are very important for understanding the market sentiments regarding a particular asset, because you can see exactly how the demand for a crypto is changing along with its price.

Many exchanges also offer advanced technical analysis tools that help traders draw conclusions from the market data in the price charts, and implement advanced trading strategies in order to maximize profits.

Another key feature of centralized exchanges are order books. An asset’s order book lists all of the market orders and trading deals of a specific crypto or trading pair on that platform. You can see the exact prices at which people are willing to buy or sell an asset and form your trading prices accordingly.

Finally, you also have your own, personal order book that lists all of the trading deals and market orders you’ve made on the platform.

Trading Fees

Crypto exchanges act as middlemen between interested crypto traders. They connect individuals who are willing to buy or sell certain assets and they guarantee that a deal between two parties will really go through, without the possibility of one side scamming the other. This convenience makes crypto trading on exchanges quite secure and that’s the main service from which platforms gain profits.

Profits are generated from platform trading fees which are usually kept quite low by most of the popular exchanges, since they have enormous trading volumes that allow them to provide services at low fees.

The most popular crypto exchange platform fee policy is the maker and taker fee model. When you simply take advantage of the current average market price of a cryptocurrency, you’re taking liquidity away from the exchange platform and you’re a market taker. On the other hand, if you’re placing buy or sell orders at prices that are different from the average market price, you’re influencing the demand for a certain crypto and you’re adding liquidity to the exchange platform. Market makers are always awarded with lower fees than market takers, as a token of gratitude for adding platform liquidity. Additionally, the more you trade during a 30-day period, the lower will your fees be.

Platform Safety

Centralized crypto exchanges are prime targets for cyber attackers and hackers who are always looking for ways to breach platform security and steal assets from users and exchanges. That’s why the best exchange platforms apply extensive security measures to keep their crypto trading operations safe.

A lot of the popular exchange platforms keep over 90% of platform assets in offline, cold storage, out of the reach of any cyber attackers. These cold wallets are often kept under 24-hour video surveillance and sometimes they are even protected by armed security guards. The same goes for company servers in order to protect any type of manual hacks.

As far as user accounts, two-factor authentication (2FA) is one of the most common means of securing that only legitimate users conduct transactions on an exchange platform and many exchanges also have KYC (know your customer) protocols that require users to prove their identity in order to prevent money laundering and scams.

Even though the most popular centralized exchanges are quite secure, it’s always better to move your crypto to a reliable wallet like Zelcore, after you’re done trading, instead of keeping your assets on an exchange platform.

Negative Aspects of Centralized Crypto Exchanges

Even though buying and exchanging crypto on centralized exchange platforms is one of the easiest and most secure ways to invest in cryptocurrency, there are multiple negative aspects of centralized exchanges that users should be aware of.

  • High Fees: When you conduct a direct peer-to-peer trading deal, you don’t need to pay any additional fees, except the standard blockchain fee for the network you’re using. Centralized crypto exchanges on the other hand charge fees for facilitating transactions and acting as intermediaries. Some exchange platforms charge quite high percentage fees, which amount to huge amounts of money for active traders.
  • Centralized control of trading: All of the trading operations on centralized exchanges are controlled by the company that operates the platform and a lot of sensitive data is stored on central servers. This can potentially be very risky if cyber attackers manage to breach a platform’s security measures. Additionally, centralized exchanges can pull the plug on trading activities at any moment and they sometimes do so without any prior warning for users.
  • Government tracking of trading activities: A lot of centralized exchanges have KYC protocols in place, which require users to provide extensive personal information. Exchanges claim to use this information to prevent money laundering, but it can also be a source for government agencies to track fiat money traffic on crypto exchanges and monitor the financial status of users without their consent.
  • Financial Manipulation: The fact that centralized exchanges are controlled by the companies that own them also opens space for huge financial manipulation. Exchanges can potentially manipulate asset prices on their platforms, lie about trading volume and conduct insider trading activities.


It’s still possible to conduct peer to peer crypto trading deals, without the use of centralized exchange platforms, but using a trustworthy exchange is probably one of the best ways to engage in crypto trading. Reputable exchange platforms offer a broad range of trading tools, a strong selection of cryptocurrencies and state of the art security measures to ensure users have a flawless trading experience.

The most important things when choosing a centralized crypto exchange is to pay attention to the user feedback, the security measures and the fee policy.